This article is Part I of the Musings on Contracts series by Glenn D. West, which explores the unique contract law issues the author has been contemplating, some focused on the specifics of M&A practice, and some just random.
Golfers the world over are familiar with the famous “Arnold Palmer”—not just the actual human golfer but also the drink consisting of half tea and half lemonade. AriZona Beverages has been selling its “Big Can” of “Arnold Palmer” drinks (as well as its many other flavors of iced tea) prepriced for retail at just 99 cents per can since 1998. How has the company done that? Well, according to a recent trial court decision out of the New York Supreme Court of Nassau County, AriZona Beverages USA, LLC v. Evercore, Inc.,[1] part of the secret has been that it has been able to ensure “that [it is] supplied with [its] requirements of beverage cans by reliable suppliers at the contracted price.”[2] Those “Big Cans” are critical, and there are apparently only two suppliers of those cans west of the Mississippi: Ball Corporation and VoBev, LLC.
The Evercore decision arose out of a
special proceeding . . . seeking narrow pre-action discovery of the identity of the entities and/or individuals who [AriZona Beverages] claim[s] have aided and abetted and conspired with EVERCORE to tortiously interfere with the supply of Big Cans (and other size cans) to [AriZona Beverages] and tortiously induce VoBev, LLC to breach its March 2023 Can Supply and Production Agreement with [AriZona Beverages].[3]
The case highlights the potential consequences of violating a confidentiality obligation in a target’s material contract as part of the target’s sales process.
Case Background
Evercore was the investment banker for VoBev in connection with a potential sale of VoBev, and, as “is common in the industry, EVERCORE hosted an electronic data room to facilitate due diligence by a third party (‘Party A’) on VoBev.”[4] One of the documents uploaded to that data room was the March 2023 Can Supply and Production Agreement between AriZona Beverages and VoBev (“Can Supply Agreement”). The Can Supply Agreement apparently contained confidentiality obligations that prohibited disclosure of its terms to a third party without AriZona Beverages’ approval.
AriZona Beverages was concerned that Party A may have been Ball Corporation, which AriZona Beverages believed was trying to acquire VoBev and then seek to terminate the Can Supply Agreement. AriZona Beverages had been separately involved in arbitration proceedings with Ball Corporation concerning the alleged undersupply of cans by Ball Corporation pursuant to a supply agreement between AriZona Beverages and a company that Ball Corporation had previously acquired (and, in fact, AriZona Beverages had prevailed in that arbitration and obtained a judgment against Ball Corporation for more than $14.5 million, with additional potential disputes still to come).[5] In addition, AriZona Beverages apparently was informed that a purported representative of Ball Corporation had been seen at VoBev’s plant with a copy of the confidential information memorandum related to VoBev’s proposed sale in hand. According to AriZona Beverages,
if [AriZona Beverages] [is] unable to obtain the Big Cans under the Can Supply Agreement [it] will suffer millions in damages and Ball [Corporation] will gain leverage over the supply “. . . especially if VoBev is sold to Ball and/or Ball causes VoBev to terminate its Supply Can Agreement with [AriZona Beverages] as part of any transaction.”[6]
Evercore claimed that, even though it was in control of the data room, it was not permitted to reveal the name of Party A, or anyone else who may have had access to the data room, because of the terms of a nondisclosure agreement (“NDA”) that was entered into between VoBev and each party that was given access to the data room, including Party A. One would assume that the NDA permitted disclosure of otherwise confidential information, like the names of the parties seeking data room access, if it was required by virtue of a court order.
Court Ruling
The court found that AriZona Beverages had “brought forth sufficient information to confirm that the Can Supply Agreement is crucial to [AriZona Beverages’] business and the breach of the requirement of non disclosure permitting other part(ies) to obtain confidential and proprietary information must be addressed through the disclosure sought herein.”[7] In addition, the court specifically found that the acts complained of by AriZona Beverages “could conceivably form the basis of a cause of action including, but not limited to, tortious interference with contract.”[8]
Accordingly, the court ordered Evercore “to disclose the identity of each entity or individual to whom it provided access to the data room . . . [or] supplied a copy of the Can Supply Agreement or otherwise disclosed its terms.”[9]
And this seems like a straightforward holding. Uploading the Can Supply Agreement to the data room would appear to constitute a violation of most confidentiality obligations regarding the disclosure of an agreement’s terms. As such, AriZona Beverages is presumably entitled to know who had access to that data room to access how it may have been damaged by that apparent violation. The fact that Evercore may have separately been under a confidentiality agreement with the bidders not to disclose their names was irrelevant to AriZona Beverages’ claim related to the violation of the Can Supply Agreement’s confidentiality obligations.
The situation that arose in Evercore should serve as a reminder that sell-side diligence in readying a company for sale is as important as buy-side diligence. Violating a confidentiality obligation in a material contract of the target could have serious consequences. Indeed, in an English case decided a few years ago, Kason Kek-Gardner Ltd. v. Process Components Ltd.,[10] the disclosure of a target’s intellectual property license agreement to a potential buyer, in violation of the license’s confidentiality obligation, was deemed sufficient to permit the counterparty to terminate the target’s license.
Practical Considerations
But wait, some may say: How exactly can you disclose the terms of a material contract of a target to a potential buyer, which understandably needs to know those terms if it is to acquire the target, when those terms are specifically prohibited from being disclosed to any third party without the consent of the counterparty? Well, obviously, you can seek the counterparty’s consent to such disclosure—but what if that is not practical or is inopportune given the need to disclose the terms when it still may not be clear that any sale will actually occur?
If the potential buyer enters into an NDA promising not to disclose anything it learned about the target during due diligence, isn’t that a sufficient safeguard to avoid violating the underlying confidentiality obligation in the target agreement? The answer seems to be no. We all learned long ago that when you agree with a friend to keep something in confidence, disclosing that confidence to another friend who promises not to further disclose the confidence is still a violation of your original agreement to keep that confidence.
It remains to be seen whether AriZona Beverages was actually damaged by the alleged violation of the Can Supply Agreement’s confidentiality agreement. But regardless, there are no easy solutions to how to address confidentiality obligations in a target’s material agreements when setting up a data room on the sell side, or even in preparing the confidential information memorandum—but these confidentiality obligations do need to be addressed. Unless there is an actual exception to the material contract’s confidentiality obligation that permits disclosure in connection with a potential sale of the target, one should not assume that one will be implied,[11] particularly if one of the potential buyers is a competitor to the target or to one of the counterparties to the target’s confidential, material agreements.
No. 608480/2024 (Sup. Ct., Nassau Cnty,. Aug. 27, 2024). ↑
Id. at 2. ↑
Id. ↑
Id. at 3. ↑
AriZona Beverages USA, LLC v. Ball Corp., 2023 WL 5334376 (S.D.N.Y. Aug. 18, 2023). ↑
Evercore, No. 608480/2024, at 2. ↑
Id. at 3–4. ↑
Id. at 3. ↑
Id. at 4. ↑
[2017] EWCA (Civ) 2132, at paras. 56–61. The license agreement specifically provided that the agreement could be terminated by either party “immediately by written notice to the other in the event of . . . any material [non-remediable] breach by the other party of any of its obligations under the Agreement.” And a “breach of the confidentiality obligations under clause 10” was deemed to “constitute[] a non-remediable material breach.” Id. at para. 48. ↑
Id. at paras. 49–55. This suggests that there needs to be more care in the initial drafting of these important portfolio company contracts. Just as an unconsidered anti-assignment or change of control provision in a target’s material contract could constitute an “exit blocker,” a confidentiality provision in that target’s material contract, with no exemptions that permit limited disclosure in connection with a potential sale, could also end up being an “exit blocker.” For those unfamiliar with the term, exit blocker is an expression used in the private equity industry to describe a provision contained within a material contract of a portfolio company that effectively makes a sale of that portfolio company extremely difficult without obtaining the consent of the counterparty to that material contract. ↑
